Federal government statistics show that South Carolina employers, like employers in every states, are more likely to be sued by an employee than by any other party. But many businesses do both themselves and their employees a legally serious disservice by not creating and enforcing policies protecting employees until after a violation of law has occurred. Another common and costly failure made by too many businesses is their failing to protect themselves through: (1) properly drafted employee covenants not to compete, (2) post-termination prohibitions against soliciting company customers or clients, (3) post-termination prohibitions against former employees hiring away key employees, or (4) post-termination restrictions against disclosing or using trade secrets of the company.

When contemplating hiring others to assist the company in its business activities, the first question to ask is whether the worker in question will be an employee or independent contractor.

The primary reason for this threshold question is found in the commonly recognized fact that employees trigger payroll tax liability, whereas independent contractors typically do not. Moreover, the employer is taking a substantial risk if he, she, or it wrongly characterizes an employee as an independent contractor. In the event of an inappropriate characterization, federal and state tax authorities may impose a penalty that at a minimum requires the employer to pay, with interest, both the taxes that should have been withheld and the taxes that the employer should have directly paid. Thus, if a business has any doubts about the correct characterization of a worker, it should consult a tax professional or formally request a characterization from the IRS itself.

While taxes are generally not paid by the company with respect to an independent contractor, the company may be required to file information returns to report certain types of payments made to independent contractors during the year. For example, it must file Form 1099-MISC, Miscellaneous Income, to report payments of $600 or more to persons not treated as employees (e.g. independent contractors) for services performed for your trade or business.

When determining the nature of the relationship, it is important to understand that what the parties themselves wish to call it is irrelevant. Rather, one must generally turn to South Carolina common law and statutory law, as well as to federal and state taxing authorities to obtain an appropriate definition. Accordingly, the person performing the services may be:

An independent contractor

A common-law employee

A statutory employee

A statutory non-employee

Common Law Employees: Under South Carolina “common law rules” a worker is generally considered an employee if you have the right to control the time, place, and manner in which the worker performs his or her duties, rather than simply contracting with the worker to achieve a particular result. In other words, an employer has the right to control an employee’s person, including the location where he or she will sit or stand, and precisely the manner and method he or she will use to fulfill his or her employment duties, and to have such a right whether such control is actually exercised or not. In contrast, no such right generally exists over the independent contractor. With an independent contractor, the principle generally has the right to specify the result, but the independent contractor determines how to achieve that result.

Statutory Employees. Note, however, that although not employees under common law, agent drivers, full-time life insurance salespersons, home workers, and traveling or city salespersons may be held to be employees by federal statute under IRS section 3121(d)(3). Specifically, if such workers are independent contractors under the common law rules, such workers may nevertheless be treated as employees by statute (statutory employees) for certain employment tax (social security, Medicare, and, in some instances, federal unemployment security tax) purposes (but not for federal income withholding) if they fall within any one of the following four categories:

A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning, if the driver is your agent or is paid on commission.

A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company.

An individual who works at home on materials or goods that you supply and that must be returned to you or to a person you name, if you also furnish specifications for the work to be done.

A full-time traveling or city salesperson who works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer s business operation. The work performed for you must be the salesperson’s principal business activity. Refer to the Salesperson section located in Publication 15-A, Employer s Supplemental Tax Guide for additional information.

And if the following applies:

The contract of service (whether oral or written) contemplates that the worker will personally perform substantially all the work.

The worker has no substantial investment in facilities other than transportation facilities used in performing the work.

There is a continuing work relationship with the business for which the services are performed.

Statutory Non-employees. There are two categories of statutory non-employees: direct sellers and licensed real estate agents. They are treated as self-employed for all Federal tax purposes, including income and employment taxes, if

Substantially all payments for their services as direct sellers or real estate agents are directly related to sales or other output, rather than to the number of hours worked and

Their services are performed under a written contract providing that they will not be treated as employees for Federal tax purposes.

IRS’s 20-Part Test. For federal tax purposes, the IRS has historically used a twenty-part characteristics balancing test that generally weighs the employment characteristics of the relationship against the independent contractor characteristics of the relationship. For example: employees generally use the tools and equipment of the employer, get paid on a time basis, and usually perform such services only for the employer, whereas independent contractors often provide their own tools and equipment, get paid on a job or unit basis, and usually perform such services for others. If the relationship has a greater number of employer-employee characteristics, it is generally deemed to be an employment relationship. Alternatively, if the relationship has a greater number or principle-independent contractor characteristics, it is generally deemed to be a principle-independent contractor relationship.

IRS Determination. IRS Form SS-8 can be filled-out and submitted to the IRS to have the IRS itself determine whether or not someone will be classified as an employee or independent contractor. However, companies may want to consult with an attorney or accountant competent in such areas prior to submitting such a form, to better ensure that the form is filled-out in a manner that comprehensively and best represents the characteristics of the relationship.

Each prospective employee should be required to fill out a detailed employment application form. Company interviewers should also know what questions they can and cannot ask. Certain questions probably should not be asked on an employment application or in an interview unless they can be justified by a “business necessity.” These include questions about height and weight, marital status, children, English language skills, friends and relatives working for the employer, arrest records, conviction records, military discharge, age or date of birth, citizenship, economic circumstances or conditions, availability for work on weekends or holidays. The Equal Employment Opportunity Commission (EEOC) has said that questions concerning these subjects may be discriminatory depending on the circumstances. In addition, medical examinations are not allowed before an offer of employment is made, and any pre-employment questions must focus on the individual’s ability to perform job related functions.

Employers risk being subject to liability for an employee’s violation of covenants with former employers. Employers, therefore, have a need to know whether an employee is bound by covenants with his or her former employers. The South Carolina Trade Secrets Act also imposes affirmative obligations on employees not to use or disclose the trade secrets of his or her former employers, regardless of whether such prohibition was included in an employee agreement and without being subject to limitations in time or geography, unlike covenants not to compete. Therefore, you may want to have your company employee agreements require each employee to represent and warrant that he or she is not subject to covenants not to compete or solicit, or other confidential or proprietary information agreement, and that, if so, he or she will not use or disclose such information is the course of his or her employment with the company.

The company should obtain and submit all necessary employment forms in a timely manner. Every employer should be familiar with the use of IRS W-4 Forms for the determination of employee federal income tax withholding amounts, the later distribution of IRS W-2 Forms to employees to notify them of their wages and withholdings, I-9 Forms to ensure against employment of illegal aliens, New Hire Reports submitted to the South Carolina Department of Social Services to ensure that child support payments are made by employed fathers, the UCE-151 form submitted to the South Carolina Employment Security Commission in order to obtain an employment security account number, and the SCTC-111 form submitted to the South Carolina Department of Revenue to obtain a state withholding tax number, to name a few. Failure to comply with these or other requirements can lead to substantial penalties.

If or when applicable, your company should become familiar with the South Carolina Wage Payment Act and the Payment of Post-termination Claims to Sales Representatives Act.

The Wage Payment Act applies to all employers who have employed more than five persons at any time in the past twelve months. The Wage Payment Act requires certain written notices be given to employees concerning wages and work hours agreed upon, time and place of payment, deductions from wages, and a seven-day written notice of change. The Act also includes time constraints on paying employees that have separated from the company. Separated employees must be paid within either 48 hours or the next regular payment period, provided it is not more than 30 days. The Wage Payment Act does not apply to independent contractors.

The Payment of Post-termination Claims to Sales Representatives Act states that when a contract between a sales representative and a principal is terminated for any reason, and the principal fails to pay the sales representative all commissions that have or will accrue under the contract to the sales representative according to the terms of the contract, then the principal is liable to the sales representative in a civil action for all amounts due the sales representative plus punitive damages in an amount not to exceed three times the amount of commissions due the sales representative, and attorney's fees actually and reasonably incurred by the sales representative in the action and court costs.

Nearly every company with employees should contemplate having a properly drafted employment policy handbook. An employment policy handbook lets employees know the ground rules of employment. It should include company policies on everything from working hours, to dress code, to benefits, to unacceptable behavior. It should also cover paid and unpaid leave, including paid holidays, vacation, sick leave, and maternity leave. It should include how vacation time is earned and if there are any limits on how much can be accrued, address the company policy on overtime or comp-time (if applicable), as well as rules regarding visitors, personal telephone calls, internet use, and anything else that is a rule in your company.

In addition to spelling out the rules, you may want to specify what the consequences of violations will be. For example, you may want to state that sexually harassing another employee is cause for dismissal. Or, if an employee violates the dress code, you may want to make it clear that they will not be able to have contact with customers.

It is also important to state in your employment policy handbook that employment with your company is "at will." When employment is "at will" this means that either the employer or the employee can end the relationship at any time, as long as no violations of federal or state law occur. This will prevent your employees from thinking that the only way you will ever let them go is for a reason specifically stated in the employee handbook and stating in the employment policy handbook that the employment relationship is "at will" will prevent the misunderstanding that the handbook is an employment contract.

However, South Carolina also allows for a safe harbor against any such misunderstanding. Therefore, pursuant to such safe harbor, employment policy handbook should consider containing a disclaimer that: (1) appears in underlined capital letters on the first page of the document and (2) is signed by the employee, which includes words to the effect:

PURSUANT TO § 41-1-110 OF THE 1976 SOUTH CAROLINA CODE OF LAWS, AS AMEDED, NOTHING IN THIS HANDBOOK (OR POLICY MANUAL) IS INTENDED TO CREATE, NOR SHALL IT BE INTERPRETED TO CREATE, A CONTRACT OF EMPLOYMENT, OR ANY PART OF A CONTRACT OF EMPLOYMENT, EITHER EXPRESS OR IMPLIED. THE RELATIONISHIP BETWEEN THE COMPANY AND ITS EMPLOYEES IS STRICTLY THAT OF EMPLOYMENT AT WILL UNLESS OTHERWISE EXPLICITLY AGREED TO BY THE COMPANY IN A SEPARATE WRITING.

I ACKNOWLEDGE MY RECEIPT AND UNDERSTANDING OF THE FOREGOING DISCLAIMER. I FURTHER ACKNOWLEDGE THAT ALL PREVIOUSLY ISSUED HANDBOOKS (OR POLICY MANUALS) ARE WITHDRAWN BY THE COMPANY AND ARE OF NO FURTHER FORM OR LEGAL EFFECT.

____________________
Name of Employee

____________________
Date

Make sure that you document the fact that you have given each employee an employment policy handbook or manual by having each sign a receipt that states that they have received and understand the employment policy handbook and disclaimer, if included. Keep the signed receipt in the employee's file.

Disclaimers in policies or procedures not contained in a handbook or manual must appear in underlined capital letters on the first page, but they need not be signed by the employee.

Seek the advice of a licensed attorney competent in employment law matters for more detailed information.

Every company should consider having a Non-Discrimination Policy in place. There are certain employment laws that bring liability if violated in the hiring or employment practices of companies. Employment laws prohibit discrimination based on age, sex, race, religion, citizenship, familial status, disability, and veteran’s status. Many employment laws do not apply to employers with less than fifteen employees, but there are exceptions. A non-discrimination policy should give guidance to management on how to comply with these laws and will help show the good faith of management in attempting to comply with these laws.

Your business might want to consider having telephone and internet use policies. Clear telephone and internet policies, established in advance, will go far to prevent or curtail employee abuse of telephone and internet use for personal purposes, saving your business time and money.

Nearly every business with employees will want to have a Sexual Harassment Policy in place. Sexual harassment policies that are made well known to every employee and supervisor prior to any instance of harassment and which are followed are always good evidence of the company’s reasonable and good faith effort to prevent sexual harassment from occurring. Sexual Harassment is generally defined as an unwelcome sexual advance or request for sexual favors, or any verbal or physical conduct of a sexual nature when submission to such conduct is used as a basis to make an employment decision or the conduct creates an offensive work environment. The business should also consider reviewing the company’s sexual harassment policies at employee meetings at least once every year (or more frequently if employ turnover warrants it) and have each employee sign a statement that they have reviewed and understood the policy and have had the opportunity to ask questions and receive answers about the policy .

You should determine whether employees are subject to non-compete or non-solicitation agreements and other restrictive covenants. There are four types of such covenants: (1) traditional covenants not to complete, (2) covenants not to solicit customers, (3) covenants not to disclose trade secrets and/or confidential information, and (4) covenants not to solicit employees. Covenants not to compete are generally disfavored by the law unless reasonably limited and necessary to protect the legitimate interests of the corporation. Covenants not to compete are generally disfavored by the law unless reasonably limited and necessary to protect the legitimate interests of the corporation. Other types of covenants that are not well drafted in strict accordance with the law may not be upheld. It is therefore crucial that all such covenants be drafted by an attorney experienced in these matters.

Specifically, South Carolina common law has evolved a test for determining the validity of a covenant not to compete. Under the “reasonableness test,” a covenant not to compete will be enforced if it can be shown that the covenant (1) is necessary for the protection of the legitimate interests of the employer, (2) is reasonably limited with respect to time and place, (3) is not unduly harsh and oppressive in curtailing the legitimate efforts of the employee to earn a livelihood, (4) is supported by valuable consideration, and (5) is reasonable from the standpoint of sound public policy.

Covenants not to solicit customers or clients after termination of employment are often included with or substituted for covenants not to compete. Such a covenant may be more appropriate than the traditional covenant not to compete, when an employee deals with national accounts or where an employer has a substantial investment in, or revenue from, then current customers or clients. Unlike traditional covenants not to complete, there is no geographic limitation on such covenants. However, some cases imply that an employee only can be restrained from contacting customers or clients he or she had prior contact with.

Trade secrets encompass a wide range of information of value to a company but not otherwise commonly known and for which reasonable measures to protect the secrecy of have been taken. Trade Secrets are protected under the South Carolina Trade Secrets Act. The South Carolina Trade Secrets Act does not preclude the use of confidentiality, non-compete or other agreements, which seek additional protection for the trade secrets of a business.

Companies will generally also want to prevent departing officers and employees from soliciting away other key employees of the company. Therefore, a covenant not to solicit employees for a reasonable time after an employee’s departure is often included in a written agreement with employees.

Your company should look into the applicability of state prohibitions against work and sales on Sunday. The State of South Carolina generally prohibits employment of others on Sundays before 1:30 p.m. and allows employees who conscientiously object to Sunday work to legally refuse to do so. However, there are many exceptions to this prohibition, provided that conscientious objection shall still be allowed.

State law also allows certain counties to opt out of such prohibitions against Sunday employment, work and sales. Thus, if your business finds itself subject to such prohibitions, county ordinances should be checked.

Employers should always ensure that they are in compliance with all state and federal poster requirements. There are several posters that must be displayed prominently in your place of business. Federal law generally requires all employers to post the following posters: The Fair Labor Standards Act, The Family Medical Leave Act, The Employee Polygraph Protection Act, The Equal Employment Opportunity Act, and the Job Safety and Health Protection Act. In addition, there may be posters that apply to special types of businesses or businesses with certain types of employees. If your business employees people with disabilities it may have to post the Notice to Workers with Disabilities poster. If your business employees migrant or seasonal workers, it may have to post the Migrant and Seasonal Agricultural Worker Protection Act poster. Businesses that are federal contractors also have special posters which may apply. They are the Davis Bacon Act poster (for government construction), the Service Contract Act poster, and the Equal Employment Opportunity poster. The US Department of Labor can be contacted at www.dol.gov.

In addition to posters of general application required by the federal government, certain employers are required to display posters if that employer is insured or self-insured to provide compensation benefits to its employees or eligible survivors in the case of work-connected injury, illness or death. Employers covered by the following statutes must obtain this insurance and post such posters. The Longshore and Harbor Worker’s Compensation Act, the Defense Base Act (covers contractors with agencies of the US government on overseas military bases), the Outer Continental Shelf Lands Act (firms working on the outer continental shelf engaged in the exploration or development of natural resources), the Non-appropriated Fund Instrumentalities Act (covers civilian employees of the armed forces). The U.S. Department of Labor’s Office of Workers’ Compensation Program provides these posters.

In South Carolina, § 41-1-10 of the 1976 South Carolina Code of Laws, as amended, requires that every employer shall keep posted in a conspicuous place in every room where five or more persons are employed a printed notice stating the provisions of the law relative to the employment of adult persons and children and the regulation of hours and working conditions. The state of South Carolina has one poster that encompasses all its requirements. This poster covers OSHA standards, rights under workers compensation, child labor laws, and the Wage Payment Act and may be obtained from the South Carolina Department of Labor.

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IMPORTANT DISCLAIMER: This checklist (in whole or part) is not an exhaustive list of legal issues applicable to any business. Its purpose is strictly educational. It is not intended to be construed as legal advice, or a substitute for legal advice, and should not be relied on without consulting a licensed attorney competent in business matters. The federal, state, and local laws and regulations on which this information was originally created are subject to change without notice. No warranty, whether express or implied, is made as to the frequency or timeliness of any corrections or updates to the information provided herein.

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